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Regulation and Compliance > Federal Regulation > SEC

Two Franklin Units Settle With SEC

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Dec. 13, 2004 — Two units of Franklin Resources (BEN) agreed to pay $20 million to settle charges that they paid brokers to promote Franklin’s mutual funds without adequately informing investors of the arrangements, the company and federal regulators said on Monday.

Under the settlement with the Securities and Exchange Commission, Franklin Advisers Inc. and Franklin Templeton Distributors Inc. will pay the civil penalties.

The SEC said that between 2001 and 2003 Franklin Distributors entered into agreements with 39 broker-dealers in which it used $52 million in fund assets to compensate the firms for recommending Franklin Templeton mutual funds over others.

In November, Franklin Resources paid $18 million to settle similar charges by the California Attorney General.

The use of brokerage commissions to compensate brokers for marketing, which is known as a “shelf space” arrangement, created a conflict of interest between the funds and Franklin Advisers because the unit benefitted from increased management fees resulting from increased fund sales, the SEC said.

Mutual funds that engage in this practice have an incentive to trade through brokerage houses that might not be the best choices for fund shareholders, the SEC said.

In agreeing to the settlement, the units neither admitted to or denied the SEC’s charges. The units also agreed to pay $1 in disgorgement. That money and the civil penalties will be distributed to certain Franklin Templeton funds under a plan to be developed by an independent consultant to be retained by Franklin Resources.

Franklin Resources will also take compliance measures designed to guard against future violations, the SEC said.

Contact Bob Keane with questions or comments at: [email protected].


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